Case Law Details
Raunika Fashion Pvt. Ltd. Vs ITO (ITAT Delhi)
The case of Raunika Fashion Pvt. Ltd. Vs ITO (ITAT Delhi) revolves around the issue of whether Section 41(1) can be applied when the assessee has not written back certain trading liabilities in their books of accounts. The assessee contends that the liabilities are still subsisting and therefore, Section 41(1) is inapplicable.
Analysis: The assessee argues that despite the Assessing Officer’s observation that the creditors could not be traced, it is incorrect for the Revenue to conclude that the liabilities shown in the balance sheet are non-existing for the purposes of Section 41(1) of the Act. The assessee maintains that Section 41(1) cannot be invoked when the amounts have not been written back in the books of accounts.
The ITAT’s decision is supported by the judgment of the Hon’ble Delhi High Court in the case of Vardhman Overseas Ltd. and the case of Dattatray Poultry Breeding Farm P. Ltd. vs. ACIT. The Hon’ble Delhi High Court in the Vardhman case observed that for Section 41(1) to be invoked, the assessee must have received a benefit by way of remission or cessation of the liability. In this case, the liability is still recognized, and its enforceability against the assessee remains. The Hon’ble Gujarat High Court in the Dattatray Poultry case made similar observations, stating that if the existence of liability is in doubt, it can be disallowed or treated as unexplained credit. As the assessee continued to declare the trading liability in its books of accounts, no benefit can be considered to have been obtained in respect of the liability through remission or cessation.
Conclusion: Based on the judicial precedents and the assessee’s consistent recognition of the trading liability in its books of accounts, the ITAT set aside and reversed the additions made under Section 41(1). This decision clarifies that Section 41(1) cannot be applied when the assessee has not written back the amounts in question, and the liabilities remain enforceable.
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